As Alberta’s crude oil takes to the rails in ever increasing amounts because of pipeline congestion, new U.S. standards for rail cars could force transport costs to increase, and make shipping of Canadian oil to Gulf of Mexico refineries even more expensive.

A report from the Eurasia Group forecasts that this won’t happen if the current situation does not worsen. But a number of serious rail accidents, including the disastrous derailment and fire at Lac-Megantic, Que., as well as growing political pressure, could force all tanker cars to be retrofitted with more puncture-resistant systems — a $1 billion cost that railways will have to pay. Such a move could also worsen the tank car shortage.

“To be sure, the retrofit issue is already a key target for environmental groups and local communities on heavily trafficked rail routes, for whom Lac-Megantic was a wake-up call. As a result, another Lac-Megantic-like accident in either the U.S. or Canada would make it fairly difficult to avoid a retrofit mandate and other measures deemed necessary to prevent future disasters,” said Elena McGovern, an energy and natural resources associate at Eurasia, a leading political risk research and consulting firm.

New rules from the U.S. Pipeline and Hazardous Materials Safety Administration, which are in early stages, should support standards that the Association of American Railroads put in place in 2011 for the construction of more rugged DOT-111 tanker cars. Deficiencies in the old tank cars’ puncture-resistance systems have led to leakages of hazardous materials during derailments, including a 2009 derailment in Illinois that saw eight million litres of ethanol catch fire and burn for over a day.

“By codifying these standards put in place back in 2011, these regulations would not have a material impact on the economics of crude-by-rail transport. Indeed, approximately half of the American fleet of 240,000 DOT-111 cars already complies with these industry standards,” said McGovern.

She said a key risk for the industry would be a retrofit requirement for older tank cars — at $18,000 per car — which would significantly extend the current 18-month backlog of railcar capacity as cars are either retired or temporarily taken out of service for upgrading. Beyond the price tag, however, such requirements could significantly set back the current expansion in railcar capacity for the oil sector, and would therefore have negative implications for prices and production.

“This would be particularly negative for North Dakota’s Bakken shale play, which relies on rail capacity to move approximately two-thirds of its surging production, as well as parts of the Eagle Ford in Texas and a growing amount of Canadian oil and oilsands production,” she said.

Similarly, the west and east coast markets are not well served by pipeline infrastructure, and are therefore heavily dependent on rail for access to the less costly, domestically produced crudes.

Eurasia concludes that the direct connection between expanded crude tank car capacity and crude market access in key producing areas like the Bakken and demand centres on the east and west coasts should prevent American authorities from taking “an overly heavy-handed regulatory approach” unless the political environment changes dramatically.

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Serious rail accidents increase likelihood U.S. will impose new standards on tanker cars

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